What You Need to Know About the Tax Cuts and Jobs Act

Signed into law by President Trump on December 22, 2017, the Tax Cuts and Jobs Act (TCJA) has left many homeowners and prospective home buyers wondering about the status of home loan interest tax deductions. The Tax Cuts and Jobs Act lasts through the 2025 tax year unless Congress decides to extend the provisions. Therefore, it’s important to familiarize yourself with the new guidelines for deducting home loan interest and how they will affect you.

What Were the Old Rules for Home Loan Interest Deductions?

Prior to the Tax Cuts and Jobs Act, homeowners were able to deduct the interest on home buying debt up to $1 million ($500,000 for married-filing-separately taxpayers). They could also deduct the interest on an additional $100,000 of debt ($50,000 for married-filing-separately tax payers) secured by the property (such as debt from a home equity loan or cash-out refinance).

Home equity loans fall in this second category of permissible debt, even if the funds were used for other purchases, such as college expenses, a vacation or house furnishings. Taxpayers who are subject to the alternative minimum tax (AMT) were required to differentiate between home equity debt that was used to improve their home and debt that was used for other purposes.

What Are the Main Points of the Tax Cuts and Jobs Act?

These new guidelines change the rules for home loan interest deductions. They reduce the amount of home acquisition debt that homeowners may deduct the interest on to $750,000 ($375,000 for taxpayers who file married-filing-separately). This new law also eliminates the provision that permitted homeowners to deduct the interest on home equity loans up to $100,000, regardless of how they used the money.

Who Does the Tax Cuts and Jobs Act Affect?

Fortunately, the Tax Cuts and Jobs Act includes grandfather provisions that allow most present homeowners to follow the guidelines set by previous tax laws for their home loan interest deductions. These provisions are intended to protect homeowners who purchased homes or took out home equity loans expecting to have the ability to utilize home loan interest deductions based on the old rules.

If you had taken out your loans before December 16, 2017 or were under a binding contract, you retained the ability to deduct interest on up to $1 million of homebuying debt. This figure includes any home equity loan debt that you have. However, in order to deduct interest on the home equity loan, the loan must have been used to purchase or improve your home.

Grandfather provisions of the Tax Cuts and Jobs Act also permit you to maintain the $1 million maximum if you decide to refinance the debt into a new mortgage. However, the balance of your new loan may not exceed the balance of your old loan; this rule basically means that you can’t refinance and take cash out. Contact Fair, Anderson & Langerman with any questions you may have about this tax act and its widespread impact. Call 702-870-7999 to speak to a representative.